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I've searched around the web for awhile now and I'm beginning to think this might be an unanswerable question. I want to know if there is a theoretical way to determine the worth of a particular good, either cash or item, independently of average purchase price (ideal selling so exactly whoever wants one and can pay for it at the price will get it).

The specific case is a virtual economy such as a video game, where there might be no way to get real world cash into or out of the game, but you want to determine if the value of SuperSwords is right to buy and what those swords are likely to be worth in the future. Is there a general formula for this situation?

A secondary case that I also wish to know about is setting the price (in-game stores) of such items. While this may push the topic more towards video game design rather than economics, I think that the basis of a price is more heavily in the modeling an economy area than a game area. What will be the best way to adjust the pricing? The four factors controlled are price sold by the store, price paid by the store, how many the store can buy and how many the store can sell.

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What you are after

The value of a good should be the highest possible utility that it would give anyone in the economy. If you care differently about different people, you are interested in the highest possible adjusted utility that it would give anyone in your economy, where you have adjust the utility with a weight that indicates how much you comparatively care about that person

It doesn't exist

This is almost what a price is: It is the highest possible utility that it would give anyone in the economy who can afford it, under frictions. These frictions could be informational (someone who benefits most from the new iPhone isn't aware of its existence) or other (some people/groups are restricted from purchasing a good, for example due to trade sanctions).

There is no other objective way that we are aware of. At the cost of sounding dogmatic, this is the superior part of capitalism compared to other economic systems: Allowing prices to judge the value of goods.

In alternative systems, you need committees or similar to do this job. While there is no theoretical reason why human's couldn't do a better job than prices do (unless you allow for hand waving the system is too complex), it turns out they don't.

Do you need real world cash for prices?

There is three properties of money: It is

  • a storage of value
  • a unit of exchange
  • unit of account

Introduction of money into your economy doesn't need to connect it to real world cash, but you need to make it valuable. Connecting it to real world cash at some rate would immediately determine its value. Say, if you allow modwizdollar at 1-to-1 rate to the USD, your dollar has immediately the same value as the dollar, and also its inflation rate.

In Diablo, players find gold and items over time, as they kill enemies. Therefore, the objective value of gold is the time it takes a player to earn that much gold, devalued by how much that time is worth to the player. The more time it takes for players to find items, the more valuable these are. For money to be work as a store of value, it is sufficient to keep finding modwizdollars costly in terms of time.

How to set prices

It depends on what your goals are, and I suppose people could write Bachelor papers on the complexity of these systems, and in fact, an economist of late publicity did exactly that for Valve.

One simple way to set up prices

One simple way would to allow the measure of goods (items) grow constantly over time. This would imply a new supply of a specific item $i$ of $S_i$. Let time be denoted by $t$.

Compute, at any time, the actual demand for goods by players given the current prices $D_i(p_{i,t})$. Given initial $p_{i,t}$,

  • Increase $p_{i,t+i}$ if $D_i(p_{i,t}) > S_i$
  • Decrease $p_{i,t+i}$ if $D_i(p_{i,t}) < S_i$

How much you want to increase or decrease these depends on many things, and I can't possibly spell out the whole model for you. Assuming that demands are stable over time, you could try a bijection.

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  • $\begingroup$ Very enlightening and detailed, much more thought through than I expected for what turns out to be a topic that I could dedicate a career to. $\endgroup$ – modwizcode Apr 6 '15 at 21:33

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